Annual Consolidated Financial Statements

Transcription

1 Annual Consolidated Financial Statements For the years ended and 2013 (Expressed in thousands of Canadian dollars, unless otherwise stated)

2 INDEPENDENT AUDITORS REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Canadian Zinc Corporation We have audited the accompanying consolidated financial statements of Canadian Zinc Corporation, which comprise the consolidated statements of financial position as at and 2013, and the consolidated statements of comprehensive loss, cash flows and changes in shareholders equity for the years ended, 2013 and 2012, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. A member firm of Ernst & Young Global Limited

3 2 We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Canadian Zinc Corporation as at and 2013, and its financial performance and its cash flows for the years ended, 2013 and 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Other matter We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Canadian Zinc Corporation s internal control over financial reporting as of, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 31, 2015 expressed an unqualified opinion on Canadian Zinc Corporation s internal control over financial reporting. Vancouver, Canada March 31, 2015 Chartered Accountants A member firm of Ernst & Young Global Limited

4 INDEPENDENT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Canadian Zinc Corporation We have audited Canadian Zinc Corporation s [the Company ] internal control over financial reporting as at, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) [the COSO criteria ]. The Company s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company s assets that could have a material effect on the financial statements. A member firm of Ernst & Young Global Limited

5 2 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of, based on the COSO criteria. We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position as at December 31, 2014 and 2013, and the consolidated statements of comprehensive loss, cash flows and changes in shareholders equity for the years ended, 2013 and 2012 of the Company and our report dated March 31, 2015 expressed an unqualified opinion thereon. Vancouver, Canada March 31, 2015 Chartered Accountants A member firm of Ernst & Young Global Limited

6 Bal ance Sh eet Consolidated Statement of Financial Position (Expressed in thousands of Canadian dollars, unless otherwise stated) December 31, 2013 ASSETS Current Cash and cash equivalents (Note 4) $ 8,792 $ 8,376 Short-term investments (Note 5) 5,023 2,005 Marketable securities (Note 6) 450 1,328 Other receivables and prepaid expenses Total Current Assets 14,964 12,241 Other long-term assets (Note 7) Property, plant and equipment (Note 8) Exploration and evaluation assets (Note 9) 5,628 5,432 Total Assets $ 21,899 $ 19,272 LIABILITIES Current Accounts payable $ 1,303 $ 917 Accrued and other liabilities Flow-through share premium (Note 11 and 14) Total Current Liabilities 2,611 1,624 Decommissioning liability (Note 10) 2,243 1,963 Total Liabilities 4,854 3,587 SHAREHOLDERS' EQUITY Share capital (Note 11) 104,028 91,823 Reserves (Note 12) 14,270 12,681 Deficit (101,253) (88,819) Total Shareholders Equity 17,045 15,685 Total Liabilities and Shareholders Equity $ 21,899 $ 19,272 Commitments (Note 20) Approved by the Board of Directors: John F. Kearney Director Brian A. Atkins, CPA, CA Director The accompanying notes are an integral part of these consolidated financial statements. 1

7 Inco me Stat em ent Consolidated Statement of Comprehensive Loss (Expressed in thousands of Canadian dollars, except for share information) Year ended December 31, Income Investment income $ 169 $ 106 $ 164 Expenses Depreciation Exploration and evaluation (Note 13) 9,996 6,089 9,125 Listing and regulatory Management and directors 850 1, Office and general Professional Project evaluation Shareholder and investor communications Share-based compensation (Note 12 (a)) ,253 8,958 11,479 Other income (expenses) Loss on marketable securities (Note 6) (878) (3,626) (8,804) Gain on sale of NSR (Note 9) - 5,439 - Finance costs (Note 10) (60) (49) (46) Gain on changes to decommissioning liability (Note 10) Tax deduction recovery (Note 14) (350) 1,941 (8,555) Net loss for the year (12,434) (6,911) (19,870) Other comprehensive income (loss) Comprehensive loss for the year $ (12,434) $ (6,911) $ (19,870) Net loss per share - basic and diluted $ (0.06) $ (0.04) $ (0.13) Weighted average number of shares outstanding Basic and diluted 192,465, ,539, ,936,692 The accompanying notes are an integral part of these consolidated financial statements. 2

8 Cash Flo ws Consolidated Statement of Cash Flows (Expressed in thousands of Canadian dollars, unless otherwise stated) Year ended December 31, Operating Activities Net loss for the year $ (12,434) $ (6,911) $ (19,870) Adjustment for items not involving cash: Accretion and depreciation Loss on marketable securities (Note 6) 878 3,626 8,804 Share-based compensation Gain on sale of NSR (Note 9) - (5,439) - Gain on changes to decommissioning liability (Note 10) - (177) - Tax deduction recovery (Note 14) (588) - (295) Change in non-cash working capital items: - Other receivables and prepaid expenses 24 (154) (233) Accounts payable and accrued liabilities 540 (128) 743 (11,403) (8,890) (10,528) Financing Activities Capital stock issued 15,751 4,005 9,119 Issuance costs (1,278) (304) (883) Proceeds on exercise of options or warrants ,830 3,747 8,238 Investing Activities Short-term investments (Note 5) (2,995) 3,453 (51) Marketable securities (Note 6) Property, plant and equipment (Note 8) (16) (13) (183) Sale of NSR (Note 9) - 10,271 - Exploration and evaluation assets (Note 9) - (416) (411) Government grants (Note 15) (3,011) 13,295 (461) Net change in cash and cash equivalents $ 416 $ 8,152 $ (2,751) Cash and cash equivalents, beginning of year $ 8,376 $ 224 $ 2,975 Net change in cash and cash equivalents 416 8,152 (2,751) Cash and cash equivalents, end of year $ 8,792 $ 8,376 $ 224 The accompanying notes are an integral part of these consolidated financial statements. 3

9 Shareho lders Equit y Consolidated Statement of Changes in Shareholders Equity (Expressed in thousands of Canadian dollars, except for share information) Common shares Number Amount Reserves Deficit Total Balance, December 31, ,109,112 $ 77,052 $ 10,750 $ (62,038) $ 25,764 Issue of shares at $0.67 per share 13,610,000 9, ,119 Share issuance costs - (761) - - (761) Share purchase warrants - (1,560) 1, Paragon Minerals Acquisition 7,299,019 3, ,394 Options and warrants converted upon Paragon acquisition Exploration and evaluation asset acquisition (Note 11) 9, Exercise of warrants at $0.40 per share 4, Share-based compensation Net loss for the year (19,870) (19,870) Balance, December 31, ,031,781 $ 87,250 $ 12,470 $ (81,908) $ 17,812 Issue of shares at $0.62 per share 6,460,000 4, ,005 Share issuance costs - (304) - - (304) Share purchase warrants - (92) Exercise of options at $0.23 per share 200, (20) - 46 Messina Minerals Acquisition (Note 3) 2,132, Options and warrants converted upon Messina acquisition Exploration and evaluation asset acquisition (Note 11) 4, Share-based compensation Net loss for the year (6,911) (6,911) Balance, December 31, ,828,575 91,823 12,681 (88,819) 15,685 Issue of shares at $0.35 per share 28,572,000 10, ,000 Issue of shares at $0.38 per share 15,134,000 4, ,692 Share issuance costs - (1,278) - - (1,278) Share purchase warrants - (1,723) 1, Exercise of options between $0.23 and $0.30 per share 1,513, (157) Share-based compensation Net loss for the year (12,434) (12,434) Balance, 218,047,709 $ 104,028 $ 14,270 $ (101,253) $ 17,045 The accompanying notes are an integral part of these consolidated financial statements. 4

10 1. Nature of Operations and Going Concern Canadian Zinc Corporation (the Company or Canadian Zinc ) is incorporated under the laws of the Province of British Columbia, Canada, and its principal business activity is the exploration and development of natural resource properties. The address of the Company s registered office is Suite 1710, 650 West Georgia Street, PO Box 11644, Vancouver, British Columbia, Canada, V6B 4N9. The Company currently exists under the Business Corporations Act (British Columbia) and its common shares are listed on the Toronto Stock Exchange ( TSX ) under the symbol CZN and on the OTCQB under the symbol CZICF. The Company is primarily engaged in the exploration, development and permitting of its mineral properties. The Company is considered to be in the exploration and development stage given that its mineral properties are not yet in production and, to date, have not earned any significant revenues. The recoverability of amounts shown for exploration and evaluation assets is dependent on the existence of economically recoverable reserves, obtaining and maintaining the necessary permits to operate a mine, obtaining the financing to complete development and future profitable production. These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern which assumes that the Company will realize its assets and discharge its liabilities in the normal course of business. Management has carried out an assessment of the going concern assumption and has concluded that the Company has sufficient cash and cash equivalents, short-term investments and marketable securities (as well as no debt obligations outside of normal course accounts payable and accrued liabilities) to continue operating for the ensuing twelve months. These consolidated financial statements do not give effect to any adjustment which would be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different than those reflected in the consolidated financial statements. 2. Significant Accounting Policies (a) Statement of Compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and were approved and authorized for issue by the Board of Directors on March 30, (b) Basis of Preparation and Consolidation These consolidated financial statements have been prepared on a historical cost basis except for financial instruments classified as fair value through profit and loss which are stated at their fair value. These audited consolidated financial statements are presented in Canadian dollars and have been prepared on the basis of IFRS standards that are effective on. The accounting policies chosen by the Company have been applied consistently to all periods presented. These consolidated financial statements include the accounts of Canadian Zinc Corporation and its wholly-owned subsidiaries Paragon Minerals Corporation ( Paragon ) and Messina Minerals Inc. ( Messina ), collectively the group. Subsidiaries are consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealized gains and losses resulting from intra-group transactions and dividends are eliminated in full. 5

11 2. Significant Accounting Policies (continued) (c) Significant Accounting Judgments, Estimates and Assumptions The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. i. Company acquisitions: Identifying a purchase transaction as being a business combination or an asset purchase requires judgment regarding whether the set of assets acquired and liabilities assumed constitutes a business based on the particular circumstances. ii. Exploration and evaluation: Significant judgment is required when determining whether facts and circumstances suggest that the carrying amount of exploration and evaluation assets may exceed its recoverable amount. Significant judgment must be exercised in determining when a project of the Company moves from the exploration and evaluation phase and into the development phase. The existence and extent of proven or probable mineral reserves; retention of regulatory permits and licences; the availability of development financing; current and future metal prices; and market sentiment are all factors considered by the Company. Accordingly, the Company having not secured development financing has deemed all projects to be in the exploration and evaluation phase. The valuation of the gain of $5,439,000 on the sale of net smelter returns royalty is subject to several judgments and estimates, in particular the valuation of the option to repurchase the net smelter returns royalty. Taking into consideration current market conditions the Company has recorded a value of $nil to this repurchase option (see Note 9). iii. iv. Decommissioning liability: Decommissioning liabilities are recognized in the period in which they arise and are stated at the best estimate of the present value of estimated future costs. These estimates require extensive judgment about the nature, cost and timing of the work to be completed, and may change with future changes to costs, environmental laws and regulations and remediation practices. Recording a provision for security deposits is subject to significant judgment as to the amount and timing of the required posting of security (see Note 10). Marketable securities: The Company measures the fair value of marketable securities not listed on a public stock exchange as a level 3 input under the fair value hierarchy using unobservable inputs for the asset including, but not limited to, risk and the performance of gold commodities and similar gold producing companies. The fair value measurement objective is to value an exit price at the measurement date from the perspective of a market participant that holds the asset and involves significant judgment. There is no assurance that the fair value assigned will be realized at any future date. v. Share-based compensation: The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for sharebased payment transactions are disclosed in Note 12. 6

12 2. Significant Accounting Policies (continued) (d) Financial Assets Financial assets are initially recorded at fair value and designated upon inception into one of the following four categories: held-to-maturity, available-for-sale, loans and receivables or at fair value through profit or loss ( FVTPL ). Financial assets classified as loans and receivables are measured at amortized cost less impairment. The Company has classified its other receivables as loans and receivables. Financial assets classified as FVTPL are measured at fair value with unrealized gains and losses recognized through earnings. The Company has classified its cash and cash equivalents, short-term investments, marketable securities, and other long-term assets as FVTPL. The Company designated its marketable securities as FVTPL upon initial recognition in accordance with an investment strategy that management uses to evaluate performance on a fair value basis. Financial assets classified as held-to-maturity are measured at amortized cost. The Company has no financial assets classified as held-to-maturity. Financial assets classified as available-for-sale are measured at fair value with unrealized gains and losses recognized in other comprehensive income (loss) except for losses in value that are considered other than temporary. The Company has no financial assets classified as available-for-sale. Transaction costs associated with FVTPL financial assets are expensed as incurred, while transaction costs associated with all other financial assets are included in the initial carrying amount of the asset. (e) Impairment of Non-Financial Assets The Company assesses at each date of the consolidated statement of financial position the carrying amounts of nonfinancial assets to determine whether there is an indication that those assets have suffered an impairment loss. If such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the assets belong. Recoverable amount is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments for the time value of money and risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the consolidated statement of comprehensive income or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset s recoverable amount since the last impairment loss was recognized. 7

13 2. Significant Accounting Policies (continued) (f) Cash and Cash Equivalents Cash and cash equivalents consist of cash and liquid investments which are readily convertible into cash with maturities of three months or less when purchased. (g) Short-term Investments Short-term investments, which consist primarily of investments in Bankers Acceptances and Guaranteed Investment Certificates, are investments with maturities of more than three months and less than one year when purchased. (h) Marketable Securities Marketable securities are recorded at their fair market value on the date of acquisition and are classified as FVTPL. The carrying value of the securities is adjusted at each subsequent reporting period to the then fair value (based upon the market bid price and the Bank of Canada quoted exchange rate if applicable) with the resulting unrealized gains or losses included in comprehensive income or loss for the period. Transaction costs relating to the purchase of marketable securities are expensed directly to comprehensive income or loss. (i) Foreign Currency Transactions The Company s reporting currency and the functional currency of all of its operations is the Canadian dollar as this is the principal currency of the economic environment in which the Company operates. Foreign currency transactions are translated at the rate in effect when the transactions occur. Monetary assets and liabilities denominated in a foreign currency (if any) are translated at the rate in effect at the reporting period date. (j) Property, Plant and Equipment ( PPE ) PPE is stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided on a declining-balance basis, less the estimated residual value, at the following annual rates: Mining equipment 30% Office equipment 20% Buildings and leasehold improvements are recorded at cost, net of accumulated depreciation. Depreciation on buildings and leasehold improvements are provided on a straight-line basis over the life of the asset. Amortization of the Prairie Creek plant and mill will be based on the unit-of-production method based upon estimated proven and probable reserves. (k) Exploration and Evaluation Assets Exploration and evaluation assets include acquired mineral use rights for mineral property held by the Company. The amount of consideration paid (in cash or share value) for mineral use rights is capitalized. The amounts shown for exploration and evaluation assets represent costs of acquisition incurred to date, less recoveries, and do not necessarily reflect present or future values. These costs will be amortized against revenue from future production or written off if the exploration and evaluation assets are abandoned or sold. Included in the cost of exploration and evaluation assets is the cost of the estimated decommissioning liability. The Company has classified exploration and evaluation assets as intangible in nature. Depletion of costs capitalized on projects put into commercial production will be recorded using the unit-of-production method based upon estimated proven and probable reserves. The Company recognizes, in income, costs recovered on exploration and evaluation assets when amounts received or receivable are in excess of the carrying amount of the corresponding asset. Ownership in exploration and evaluation assets involves certain inherent risks, including geological, metal prices, operating costs, and permitting risks. Many of these risks are outside the Company s control. The ultimate recoverability of the amounts capitalized for the exploration and evaluation assets is dependent upon the delineation of economically recoverable ore reserves, obtaining the necessary financing to complete their development, obtaining the necessary permits to operate a mine, and realizing profitable production or proceeds from the disposition thereof. Management s estimates of recoverability of the Company s investment in exploration and evaluation assets have been based on current and expected conditions. However, it is possible that changes could occur which could adversely affect management s estimates and may result in future write downs of exploration and evaluation assets carrying values. 8

14 2. Significant Accounting Policies (continued) (l) Financial Liabilities Financial liabilities are initially recorded at fair value and designated upon inception as FVTPL or classified as other financial liabilities. Financial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transaction costs. Subsequently, they are measured at amortized cost using the effective interest method. The Company has classified its accounts payable and accrued liabilities as other financial liabilities. Financial liabilities classified as FVTPL include financial liabilities held-for-trading and financial liabilities designated upon initial recognition as FVTPL. Fair value changes on financial liabilities classified as FVTPL are recognized through the consolidated statement of comprehensive income or loss. The Company has no financial liabilities classified as FVTPL. (m) Decommissioning, Restoration and Similar Liabilities The Company recognizes liabilities for statutory, contractual, constructive or legal obligations, including those associated with the reclamation of exploration and evaluation assets and PPE, when those obligations result from the acquisition, construction, development or normal operation of the assets. Initially, a provision for a decommissioning liability is recognized at its present value in the period in which it is incurred, which is generally when an environmental disturbance occurs or a constructive obligation is determined. Upon initial recognition of the liability, a corresponding amount is added to the carrying amount of the related asset and the cost is amortized as an expense over the economic life of the asset using the unit-of-production method. Following the initial recognition of a decommissioning liability, the carrying amount of the liability is increased for the passage of time and adjusted for changes to the current market-based discount rate and the amount or timing of the underlying cash flows needed to settle the obligation. Changes to estimated future costs are recognized in the consolidated statement of financial position by either increasing or decreasing the decommissioning liability and the decommissioning asset. (n) Flow-Through Shares Current Canadian tax legislation permits mining entities to issue flow-through shares to investors. Flow-through shares are securities issued to investors whereby the deductions for tax purposes related to exploration and evaluation expenditures may be claimed by investors instead of the entity. The issue of flow-through shares is in substance an issue of ordinary shares and the sale of tax deductions. At the time the Company issues flow-through shares, the sale of tax deductions is deferred and presented as other liabilities in the consolidated statement of financial position to recognize the obligation to incur and renounce eligible resource exploration and evaluation expenditures. The tax deduction is measured as the difference between the current market price of the Company s common shares and the issue price of the flow-through share. Upon incurring and renouncing eligible resource exploration and evaluation expenditures, the Company recognizes the sale of tax deductions as a tax deduction recovery on the consolidated statement of comprehensive income or loss and reduces the liability for flow-through shares premium. (o) Investment Income Investment income on cash and cash equivalents and short-term investments is recognized as it is earned. (p) Exploration and Evaluation Costs Exploration and evaluation costs, other than those described in Note 2(k), are expensed as incurred until such time as mineral reserves are proven or probable; permits to operate the mineral resource property are received; and financing to complete development has been obtained. Following these three events and approval of the Board of Directors to commence mining development and operations, exploration and evaluation expenditures are capitalized as deferred development expenditures included within exploration and evaluation assets. 9

15 2. Significant Accounting Policies (continued) (q) Share-based Compensation The Company follows the fair value method of accounting for the stock option awards granted to employees, directors and consultants. The fair value of stock options is determined by the Black-Scholes Option Pricing Model with assumptions for risk-free interest rates, dividend yields, volatility of the expected market price of the Company s common shares and an expected life of the options. The number of stock option awards expected to vest are estimated using a forfeiture rate based on historical experience and future expectations. The fair value of direct awards of stock is determined by the quoted market price of the Company s stock. Share-based compensation is amortized to earnings over the vesting period of the related option. The Company uses graded or accelerated amortization which specifies that each vesting tranche must be accounted for as a separate arrangement with a unique fair value measurement. Each vesting tranche is subsequently amortized separately and in parallel from the grant date. Option-pricing models require the use of highly subjective estimates and assumptions including the expected stock price volatility. Changes in the underlying assumptions can materially affect the fair value estimates and, therefore, existing models do not necessarily provide reliable measurement of the fair value of the Company s stock options. (r) Income Taxes The Company follows the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are recognized in the period for temporary differences between the tax and accounting bases of assets and liabilities as well as for the potential benefit of income tax losses and other deductions carried forward to future years. Deferred income tax assets and liabilities are measured using substantively enacted tax rates and laws expected to apply in the years in which temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in the year that includes the substantive enactment date. The value of deferred income tax assets is reviewed annually and adjusted, if necessary, to reflect the amount probable of being realized. (s) Earnings (Loss) Per Common Share Earnings (loss) per share calculations are based on the net income (loss) attributable to common shareholders for the year divided by the weighted average number of common shares issued and outstanding during the year. Diluted earnings per share calculations are based on the net income attributable to common shareholders for the year divided by the weighted average number of common shares outstanding during the year plus the effects of dilutive common share equivalents. This method requires that the dilutive effect of outstanding options and warrants issued be calculated using the treasury stock method. This method assumes that all common share equivalents have been exercised at the beginning of the year (or at the time of issuance, if later), and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of common shares during the year. The incremental number of common shares that would be issued is included in the calculation of diluted earnings per share. Diluted loss per share calculations are based on the net loss attributable to common shareholders for the year divided by the weighted average number of common shares issued and outstanding during the year. Stock options and share purchase warrants are not included in the computation of loss per share for the years ended and 2013 as such inclusion would be anti-dilutive. (t) Government Grants Grants from the government are recognized at their fair value where there is a reasonable assurance that the Company has complied with all conditions necessary to receive the grants and collectability is reasonably assured. Government grants relating to costs are accrued as receivable and recognized in the consolidated statement of comprehensive income or loss as a reduction of the related expense. Government grants relating to property, plant and equipment are accrued as receivable and recognized in the consolidated statement of financial position as a reduction of the carrying value of the related asset. 10

16 2. Significant Accounting Policies (continued) (u) IFRS Standards Adopted IFRIC 21 IFRS 1 (Amendment) IFRS 10 (Amendment) IFRS 12 (Amendment) IFRS 13 (Amendment) IAS 27 (Amendment) IAS 32 (Amendment) IAS 36 (Amendment) IAS 39 (Amendment) Levies First-time Adoption of International Financial Reporting Standards Consolidated Financial Statements Disclosure of Interest in Other Entities Fair Value Measurement Separate Financial Statements Offsetting Financial Assets and Financial Liabilities Recoverable Amount Disclosures for Non-Financial Assets Novation of Derivatives and Continuation of Hedge Accounting The adoption of these standards, adopted effective January 1, 2014, did not have a material impact on the consolidated results and financial position of the Company. (v) IFRS Standards Issued But Not Yet Effective IFRS 9 Financial Instruments (4) IFRS 14 Regulatory Deferral Accounts (2) IFRS 15 Revenue from Contracts with Customers (3) IFRS 2 (Amendment) Share-based Payment (1) IFRS 3 (Amendment) Business Combinations (1) IFRS 5 (Amendment) Non-current Assets Held for Sale and Discontinued Operations (2) IFRS 7 (Amendment) Financial Instruments: Disclosures (2) IFRS 8 (Amendment) Operating Segments (1) IFRS 10 (Amendment) Consolidated Financial Statements (2) IFRS 11 (Amendment) Joint Arrangements (2) IFRS 12 (Amendment) Disclosure of Interest in Other Entities (2) IFRS 13 (Amendment) Fair Value Measurement (1) IAS 1 (Amendment) Presentation of Financial Statements (2) IAS 16 (Amendment) (1, 2) Property, Plant and Equipment IAS 19 (Amendment) (1, 2) Employee Benefits IAS 24 (Amendment) Related Party Disclosures (1) IAS 27 (Amendment) Separate Financial Statements (2) IAS 28 (Amendment) Investments in Associates and Joint Ventures (2) IAS 34 (Amendment) Interim Financial Reporting (2) IAS 38 (Amendment) (1, 2) Intangible Assets IAS 40 (Amendment) Investment Property (1) IAS 41 (Amendment) Agriculture (2) (1) (2) (3) (4) For annual periods beginning on or after July 1, For annual periods beginning on or after January 1, For annual periods beginning on or after January 1, For annual periods beginning on or after January 1, The Company anticipates that the application of these standards and amendments on their effective dates will not have a material impact on the consolidated results and financial position of the Company. 11

17 3. Messina Minerals Inc. Acquisition The Company undertook no significant acquisitions in the year ended. On December 20, 2013, the Company acquired the outstanding shares of Messina Minerals Inc. ( Messina ), a company which holds mineral interests in the Canadian province of Newfoundland and Labrador. The acquisition has been accounted for as a purchase of assets and the assumption of liabilities by the Company. The transaction does not qualify as a business combination under IFRS 3, Business Combinations, as significant inputs and processes that constitute a business were not identified. Total consideration transferred was $1,372,000, which was comprised of the issuance of 2,132,714 common shares valued at $896,000 based on the closing market price of the Company s shares on December 20, 2013 of $0.42 per share, conversion of options and warrants with a fair value of $19,000 (See Note 12), 3,000,000 Messina shares previously acquired and valued at $180,000 based on the closing market price of Messina shares on December 20, 2013 of $0.06 per share and transaction costs of $277,000. A value of $1,324,000 was allocated to exploration and evaluation assets for the mineral interests. (See Notes 8, 9, 11, and 12). The purchase price for Messina was allocated to the assets acquired and the liabilities assumed based upon their relative fair value at the date of acquisition as follows: Purchase price Issued 2,132,714 Canadian Zinc common shares at $0.42 per share $ 896 Acquired 3,000,000 Messina shares at $0.06 per share 180 Options and warrants converted upon acquisition 19 Transaction costs 277 Fair value of net assets acquired $ 1,372 Cash and cash equivalents $ 14 Other assets 70 Accounts payable and accrued liabilities (36) Exploration and evaluation assets 1,324 $ 1, Cash and Cash Equivalents The Company s cash and cash equivalents at consisted of cash of $446,000 and cash equivalents of $8,346,000 (December 31, cash of $334,000 and cash equivalents of $8,042,000). 5. Short-term Investments Short-term investments, which consist primarily of investments in Bankers Acceptances and Guaranteed Investment Certificates, are investments with maturities of more than three months and less than one year when purchased. At, short-term investments were valued at $5,023,000, earning income at a rate of 1.75% (December 31, $2,005,000, earning income at a rate of 1.71%). The market value of these assets is based upon quoted market values and the recorded amounts at and December 31, 2013 equal the fair value for these investments. 12

18 6. Marketable Securities December 31, 2013 # of Shares Original Cost Fair Value # of Shares Original Cost Fair Value Vatukoula Gold Mines plc 12,573,380 $ 10,142 $ ,573,380 $ 10,142 $ 1,328 $ 10,142 $ 450 $ 10,142 $ 1, Other Long-term Assets As at, other long-term assets consist of non-interest bearing reclamation security deposits of $525,000 (December 31, $525,000) and restricted cash equivalents of $nil (December 31, $214,000). The non-interest bearing reclamation security deposits are lodged with government agencies as security in support of certain reclamation obligations. The restricted cash equivalents was security for a letter of guarantee issued by a financial institution, to secure performance by the Company of certain obligations pursuant to an authorization to carry out road repairs adjacent to the Prairie Creek Mine Property granted by the Department of Fisheries and Oceans Canada. 8. Property, Plant and Equipment Land Prairie Creek Plant & Mill Mining Equipment Office Equipment Buildings and Leasehold Improvements Total Acquisition Cost December 31, 2012 $ - $ 500 $ 1,660 $ 164 $ 60 $ 2,384 Additions December 31, , ,457 Additions $ 500 $ 1,689 $ 164 $ 80 $ 2,473 Accumulated Depreciation December 31, 2012 $ - $ - $ 1,280 $ 133 $ 60 $ 1,473 Depreciation charge December 31, , ,597 Depreciation charge $ - $ - $ 1,482 $ 147 $ 62 $ 1,691 Net Book Value December 31, 2012 $ - $ 500 $ 380 $ 31 $ - $ 911 December 31,

19 9. Exploration and Evaluation Assets The Company holds a 100% interest in the Prairie Creek Mine property located in the Northwest Territories, Canada. It also holds, through the Company s wholly-owned subsidiaries Paragon and Messina, a 100% interest in the South Tally Pond, Tulks South and Long Lake properties in Newfoundland and Labrador. In May 2013, the Company sold a 1.2% net smelter returns royalty ( NSR ) on the Prairie Creek Mine for net proceeds of $10,271,000 to Sandstorm Metals & Energy Ltd. The Company s policy is to recognize, in income, costs recovered on exploration and evaluation assets when amounts received or receivable are in excess of the carrying amount of the corresponding exploration and evaluation asset. Accordingly, the Company reduced the carrying value of the Prairie Creek Mine exploration and evaluation asset to $nil during the second quarter of 2013 and recognized a gain of $5,439,000 on the consolidated statement of income or loss. In addition, as part of the agreement, Sandstorm has granted Canadian Zinc the option, for a period of 30 months, to repurchase 100% of the NSR without premium or penalty for US$10 million, if Canadian Zinc enters into a metal stream agreement with Sandstorm under which Sandstorm will provide Canadian Zinc with an upfront deposit of not less than US$90 million to be used to finance part of the capital cost to develop the Prairie Creek Mine. December 31, 2013 Prairie Creek Mine $ 220 $ - Messina properties 1,299 1,324 Paragon properties 4,109 4,108 $ 5,628 $ 5,432 The Company has incurred historical exploration and evaluation costs of $69,334,000 on the Prairie Creek Mine asset and $3,263,000 on exploration properties in central Newfoundland (see Note 13) and has expensed these costs pursuant to its accounting policy. 10. Decommissioning Liability Reclamation and closure costs for the Prairie Creek Property have been estimated based on the Company s understanding of its current obligations under its existing surface leases, land use permits and class B Water Licence for reclamation and closure of the Prairie Creek Mine site as it now exists with the current infrastructure and assuming a mine life of 11 years. These reclamation and closure costs have been measured based on the net present value of the best estimate of future cash expenditures. These reclamation and closure costs are capitalized into exploration and evaluation assets and amortized over the life of the related asset (see Note 9). The accretion expense is included in finance costs in the consolidated statement of comprehensive income or loss. The Company s undiscounted decommissioning liability of the Prairie Creek site, as it currently exists, is $3,142,000 (December 31, $2,961,000), being the estimated future net cash outflows of the reclamation and closure costs, including a 30% contingency and inflation of 2%, required to satisfy the obligations, settlement of which will occur subsequent to closure of the mine through to The discounted decommissioning liability is calculated using a risk free rate of 2.22% per annum (December 31, %). December 31, 2013 Balance beginning of year $ 1,963 $ 2,148 Accretion expense Change in estimates (1) 220 (234) Balance end of year $ 2,243 $ 1,963 (1) The change in estimates represents the increase (decrease) in net present value of the decommissioning liability and results in an offsetting addition (deduction) to the carrying value of the corresponding exploration and evaluation asset (see note 9) until the corresponding asset is reduced to nil, after which a decrease in the net present value is recognised as a gain in the income statement. 14

20 10. Decommissioning Liability (continued) The Company currently holds a surface lease, issued by the Minister of Aboriginal Affairs and Northern Development Canada, which limits the use of the land for mine site care and maintenance purposes only and establishes the Company's current responsibility for abandonment and restoration in accordance with an abandonment and restoration plan attached as a schedule to the surface lease. The Company has applied to the Minister of Aboriginal Affairs and Northern Development Canada for a new lease for production to replace the existing care and maintenance surface lease. In September 2013, the Company was issued with the Type A Water Licence MV2008L2-002 by the Mackenzie Valley Water Board ( MVLWB ). The Type A Water Licence is valid for a term of seven years and entitles Canadian Zinc to use water, dewater the underground mine for the purposes of mining and to dispose of waste for mining and milling. The Licence is subject to numerous conditions, including the requirement to post and maintain security, in stages, with the Minister of Aboriginal Affairs and Northern Development Canada totalling $13.07 million on a schedule of $3 million within ninety days of the effective date of the licence, $5 million prior to extracting waste rock from the underground mine and $5.07 million prior to commencing milling. In June 2013, the MVLWB issued Land Use Permit MV2008D0014 which permits Canadian Zinc to extract ore and waste rock from the Prairie Creek Mine, operate a flotation mill concentrator to produce zinc and lead concentrates, create a waste rock facility, and refurbish and develop site facilities in support of the mining operation, along with the eventual closure and reclamation of the mine site. This permit which is valid for a term of five years, with an optional two year extension, is subject to numerous conditions including the requirement to deposit, in stages, with the Minister of Aboriginal Affairs and Northern Development Canada a total of $4 million on a schedule of $3 million within ninety days of the issue of the permit and $1 million prior to construction upgrades to the mill commencing. In June and December 2013, the Company filed requests with the MVLWB for amendments to the timing schedules of the various security deposits to be provided to the Minister of Aboriginal Affairs and Northern Development Canada under the Type A Water Licence and the Land Use Permit. The Department of Aboriginal Affairs and Northern Development Canada has confirmed to the MVLWB that the Board s assessment of the Company s liability for the site and cost of closure and reclamation is not applicable until a new lease for production replaces the existing care and maintenance surface lease. The Company has provided responses to Information Requests and the MVLWB has circulated the application to interested parties for comment. In August 2014, CZN submitted an amended development schedule for the Prairie Creek Mine to the MVLWB and this was followed up by an application to the MVLWB in October 2014 requesting that the Water Licence be held in abeyance until more certainty develops around the actual commencement of construction and the mine development schedule. This action would defer the schedule and dates in the licence for the submission of various plans until the activation of licence and the commencement of operations. The MVLWB is considering the Company s request and has circulated this application to interested parties for comment. The Company also holds various land use permits, water licences and construction permits from the MVLWB and Parks Canada with the requirement to post security for future reclamation in the total amount of $3.33 million, to be posted prior to construction of infrastructure or commencement of operations. The Company has previously posted reclamation security deposits in support of current reclamation obligations in the amount of $525,000 (see Note 7). 15